Workshop on Developing Corporate Bond Market Mr. Masato Miyachi Office of Regional Economic Integration Asian Development Bank Session 1: Overview of Corporate.

Workshop on Developing Corporate Bond Market

Mr. Masato Miyachi

Office of Regional Economic Integration

Asian Development Bank

Session 1: Overview of Corporate Bond Market in Asia-Pacific Region

22 September 2008 Shanghai, PRC

Outline

• Rationale to develop corporate bond markets

• Basic factors for the development of corporate bond markets

• Private-Public sector cooperation to promote corporate bond markets

Corporate bond markets can:• Reduce the double mismatch problem

(currency and maturity)• Reduce over-dependence on bank

borrowing and lower borrowing costs• Contribute to efficient resource allocation• Mitigate risks• Provide an alternative source of funds

Advantages of corporate bond finance

Size of LCY Bond Market in USD (BIS) (excluding Japan)

0

500

1000

1500

2000

2500

3000

3500

4000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

In M

Illio

n U

SD

Govt Corporate FIs

Size of LCY Bond Market in USD (BIS) (excluding Japan)

0%

20%

40%

60%

80%

100%

% M

ark

et

Sh

are

Govt Corporate FIs

• Corporate bonds in ASEAN+3 countries grew 25.6% from 2006-2007.

• However, corporate debt markets continue to be underdeveloped and shrinking• Less than one-third of the over 100 countries

with equity markets have corporate debt markets

• Corporate debt markets average only one-tenth the size of the corresponding equity markets

Corporate bond market development

Bond Development Indicator*

Size of LCY Bond Market in % GDP (Japan)

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Size of LCY Bond Market in % GDP (Singapore)

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007%

of G

DP

Govt Corp FIs

* AsianBondsOnline

Bond Development Indicator

Size of LCY Bond Market in % GDP (Malaysia)

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Size of LCY Bond Market in % of GDP (Korea)

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Bond Development Indicator

Size of LCY Bond Market in % of GDP (Hong Kong China)

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Size of LCY Bond Market in % GDP (PR China)

0

10

20

30

40

50

60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007%

of G

DP

Govt Corp FIs

Bond Development Indicator

Size of LCY Bond Market in % GDP (Thailand)

0

10

20

30

40

50

60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Bond Development Indicator

Size of LCY Bond Market in % GDP (Philippines)

0

5

10

15

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f G

DP

Govt Corp FIs

Size of LCY Bond Market in % of GDP (Indonesia)

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007%

of G

DP

Govt Corp FIs

Critical Areas or Factors of Bond Development*

Bond markets are basically influenced by:

1. Government Policies2. Regulatory Framework3. Market Infrastructure4. Liquidity5. Risk Management

* Compendium of Sound Practices, ADB

Government Policies Factor

The government:

• is a key player as an ISSUER, REGULATOR, FACILITATOR, PROMOTER and CATALYST in the initial stage of bond market development (ex. Malaysia and Korea)

• strikes balance between Sovereign Debt Management Policy and Bond Development Strategy

• can provide consistent tax policies for all financial instruments and participants

Government Policies Factor

Malaysia• promoted development of needed infrastructure

for bond market development including bond rating agencies, and made bond ratings mandatory

• actively encouraged Employee Provident fund to invest in corporate bonds to help finance infrastructure and energy investments

• by 2000 corporate debt market in Malaysia amounted to 47% of GDP from just 4% in 1989

Government Policies Factor

Korea• Korean government first approved the Capital

Market Promotion Act of 1968.• In the 70's, the government introduced

guaranteed corporate bonds and ensured that corporate bonds issued by the industrial conglomerates (chaebols) carried bank guarantees.

• By 2000, corporate debt market rose to 26% of GDP from 11.1% in 1989.

Government Policies Factor

• Government support for the development of Government support for the development of the corporate bond markets in Malaysia and the corporate bond markets in Malaysia and Korea were substantial and sustained. Korea were substantial and sustained.

• Relatively rapid development of bond Relatively rapid development of bond markets in Malaysia and Korea suggest that markets in Malaysia and Korea suggest that government support is important for bond government support is important for bond market development at least in the initial market development at least in the initial stage. stage.

• However, government interventions should However, government interventions should be carefully designed to avoid problems.be carefully designed to avoid problems.

Regulatory Framework Factor

• Adequate investor protection and sound business practices or codes of conduct that reduce systemic risks to the minimum

• Clearly defined market rules, a high degree of transparency as well as high prudential standards and governance principles that recognize the importance of fiduciary obligations

Market Structure Factor

• Governed by clear and unambiguous rules and procedures that are soundly enforced and made freely available to interested parties

• Participants form clear expectations about the operation of the systems in times of stress and the financial risks involved

Liquidity Factor

• Accurate and reliable benchmark yield curves

• Certainty about reliable pricing for bonds

• Availability of information on market conditions, and issuer decisions and actions

• Minimized transaction cost

• Diverse participants (including pension, insurance and mutual funds)

Risk Management Factor

• Made effective by both Issuer (especially government) and Investor

• Risk Audit conducted accurately

• Risk management frameworks

• Market intermediaries to transfer risk

• Clear delineation between risk-taking, risk-monitoring & internal control systems

• Credit Rating agencies’ credibility and reliability

Other factors

• Timeframe required to implement necessary Timeframe required to implement necessary reforms to fully develop corporate debt reforms to fully develop corporate debt markets cannot be easily determinedmarkets cannot be easily determined

• Sense of urgency has to be promulgated Sense of urgency has to be promulgated and professed and professed

• Strong political will and efficient coordination Strong political will and efficient coordination and cooperation among authoritiesand cooperation among authorities

• Central BanksCentral Banks

Public-Private Sector Cooperation in Developing Corporate Bond Market

• Financial sector stability is the key word Constructive partnership between government,

banks, and corporate sector in creating diversified and competitive financial sector

• Sustained government support in development of corporate bond market

Creating benchmark yield curve Strengthening institutional investors Adopting outward looking policies

Public-Private Sector Cooperation in Developing Corporate Bond Market

Firms need to adopt to rapid changes in the international market to remain competitive.

Make data on bond prices and quantities available on real-time.

Develop professional information services.

Public-Private Sector Cooperation in Developing Corporate Bond Market

Fostering complementary relationship between banks and corporate bond market

Promote supportive role of banks in corporate bond market development.

Continue to strengthen banking system at the same time initiate development of corporate bond market by removing barriers.

Thank you.

For More Information:

Mr. Masato MiyachiSenior AdvisorOffice of Regional Economic Integration (OREI)[email protected](+63-2) 632-6832